What is the appropriate balance-to-limit or debt-to-income ratio? I do not maintain a balance on my credit cards but worry that I have credit limits that are too high and could impact my overall credit.

- TBL

Dear TBL,

Your balance-to-limit ratio and debt-to-income ratios are two very different things. Based on your questions, you are describing the balance-to-limit ratio rather than the debt-to-income ratio.

Your balance-to-limit ratio, also known as your utilization rate, is calculated by dividing the total of the balances on your credit cards by the total of the credit limits on your credit cards. A high balance-to-limit ratio warns creditors that you may be experiencing financial difficulty or using credit to live beyond your means.

A high utilization rate is a strong sign of credit risk, second only to your payment history. According to VantageScore, your balances should not exceed 30 percent of your credit limits. However, the lower your utilization rate, the better. The best strategy is to pay your balances in full each month.

Reducing your credit limits will cause your utilization rate to increase because your existing balances will become a higher percentage of your reduced total available credit limits. Generally, reducing your credit limits will hurt your credit scores because of this mathematical reality.

However, every person has a unique credit history. In some instances, having limits that are too high may be having a greater effect than a high utilization rate. To find out if that is true for you, purchase your credit score when you request your report. You will get your score as well as a list of the risk factors that most affected the number.

Use those factors to determine what action you should take.

Phrases like “balances as compared to your credit limits are too high” indicate you have a high utilization rate and need to pay down you balances. If you see “too much available credit” or something similar, you probably need to close an account or have your credit limits reduced.

Risk factors are typically listed in order of importance. Address one at a time, a little at a time to improve your credit scores.

Your debt-to-income ratio actually has nothing to do with credit scores. Your debt-to-income ratio is the total of all your monthly debts, including installment loans, divided by your total monthly income. Income information is not part of your credit report. Instead, you provide it as part of your credit application.

The debt-to-income ratio is calculated by your lender when you apply for credit and gives them a sense of your capacity to repay additional new debt.

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